[Summary] UN Urges “Stop Raising Interest Rates”... Fed Third-in-Command Says “Not Over Yet”

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] "It will deliver a severe shock to low-income countries and plunge the global economy into recession." A United Nations (UN) affiliated agency has urged central banks around the world, including the U.S. Federal Reserve (Fed), to halt interest rate hikes. On the other hand, John Williams, President of the New York Federal Reserve Bank, known as the 'third-in-command' of the Fed, said that the tightening policy has begun to calm demand and warned of further rate hikes, stating "The Fed's work is not yet finished."

The United Nations Conference on Trade and Development (UNCTAD) stated in its annual international economic outlook report released on the 3rd (local time) that "If the Fed and other central banks continue rapid interest rate hikes, it will cause severe damage to developing countries."

According to the report, if the Fed's benchmark interest rate rises by 1 percentage point, the GDP of other advanced countries is estimated to decrease by 0.5%, and the GDP of developing countries by 0.8% over three years. Due to the Fed's rate hikes so far this year, the GDP of developing countries is expected to shrink by $360 billion over the next three years.

Rebecca Greenspan, Secretary-General of UNCTAD, expressed concern that the current interest rate hikes by central banks worldwide "are harming the most vulnerable people, such as those in developing countries, and pose a risk of pushing the global economy into recession." According to UNCTAD, the rate hikes by central banks in July marked the highest level since statistics began in the early 1970s.

In particular, UNCTAD pointed out that simultaneous interest rate hikes by major countries will not help ease inflation. Since recent inflation is caused by supply-side issues, it cannot be controlled by rate hikes that suppress demand, and policies to expand supply are necessary. They also suggested introducing one-time 'windfall taxes' on energy companies to control the rapid rise in prices of key products.

This warning draws more attention as the Fed has taken three consecutive giant steps (raising the benchmark interest rate by 0.75 percentage points each time), accelerating the tightening by major central banks.

President Williams emphasized in a speech on the same day that the Fed's responsibility for price stability is not over. He said, "The Fed's policy efforts to slow demand are showing some effect," and stated that high interest rates must be maintained for a longer period to achieve the inflation target.

Since entering the tightening cycle in March, the Fed has raised the benchmark interest rate a total of five times, increasing it by 3 percentage points. At the September meeting, it also confirmed that the median interest rate for the end of this year was raised to 4.4%, and the median rate for next year to 4.6%, reaffirming that high-intensity tightening will continue for the time being. Meanwhile, major countries such as the United Kingdom, Switzerland, Norway, and Hong Kong are also accelerating their rate hikes simultaneously. Recently, the Reserve Bank of India warned that following the COVID-19 pandemic and Russia's invasion of Ukraine, the global economy is now facing a third shock from major countries' interest rate hikes.